The IPKat

Passionate about IP! Since June 2003 the IPKat has covered copyright, patent, trade mark, designs, info-tech, privacy and confidentiality issues from a mainly UK and European perspective. Read, post comments and participate!

US patent litigation on the move again following In re Cray

While the AmeriKat has been traversing the globe over the last few weeks, big changes in US patent litigation have continued apace, especially where venue is concerned - most recently in Re Cray. The AmeriKat's Californian friends at Fenwick & West - Bryan Kohm, Dadvid Tellekson, Melanie Mayer and Reilly Stoler - summarize the latest position on venue for the Kat's non-US readers:

"Recently, the United States Court of Appeals for
the Federal Circuit issued a decision in In
re Cray that will likely deal a serious blow to abusive forum shopping
engaged in by non-practicing entities.
28 U.S.C. § 1400(b)limits venue in patent cases to either where a
defendant “resides” or where it has both committed acts of infringement and
maintains a “regular and established place of business.” The Supreme Court’s decision in TC Heartland v. Kraft Foods, 137 S. Ct.
1514,earlier this year, held that the
first prong—“residence”—was limited to a company’s place of incorporation or
principal place of business.

The Cray decision addresses the standard for
determining what constitutes a “regular and established place of business”
under the second prong of Section 1400(b). Specifically, the Federal Circuit set
forth three requirements for a “regular and established place of business”: (1)
the location must be a “place,” (2) that place must be “regular and
established,” and (3) the place must be “of the defendant.” Applying these requirements, the Federal
Circuit held that petitioner Cray’s employment of a remote employee in the
Eastern District of Texas did not create venue in that district as to
Cray.BackgroundIn the United States, venue in patent cases is governed by Section
1400(b), which as noted above contains two alternatives for establishing proper
venue. However, since the Federal
Circuit’s 1990 holding in VE Holdings
that a company “resided” anywhere a defendant purposefully directed its activities,
provided that the plaintiff’s claim arose out of those activities. Some courts broadly construed VE Holdings, which, in effect, rendered
venue proper anywhere a defendant engaged in business in any way related to the
alleged infringement.

Over time, as a result of this broad
interpretation, certain courts favorable to patent plaintiffs became increasingly
popular district for patent litigation. For
example, the Eastern District of Texas, which covers a largely rural portion of
Texas, emerged as a focal point for patent litigation in the United
States. In fact, in 2016, more than 40%
of U.S. patent cases were filed there, and a single judge in the district—Judge
Rodney Gilstrap—presided over nearly 25% of all patent cases in the nation.In TC
Heartland, the Supreme Court abrogated VE
Holdings and held that a defendant “resides” under patent venue statute only
where the corporation is incorporated or maintains its principal place of
business. Given that most companies do
not “reside” in the favored patent venues under this standard, the focus in
determining venue shifted to the second alternative. Having previously held that the patent venue
statute was irrelevant to the patent venue analysis, the Federal Circuit had
not addressed the meaning of “regular and established place of business” in
over 30 years. District Court Proceedings

In 2015, Raytheon sued Cray, a maker of
advanced supercomputers, in the Eastern District of Texas.[1] Following the TC Heartland decision, Cray challenged venue on the ground that it
lacked a “regular and established place of business” in the district. Although Cray employed a single remote
employee that lived in the district, Cray maintained no facilities in the
district, nor did it have any customers there.
The district court denied Cray’s motion, finding that Cray’s employment
of a single remote employee satisfied the “regular and established place of
business” requirement of Section 1400(b).
The court reasoned that the employee made substantial sales while
employed at Cray, was supported by the administrative office in Minnesota, and
could access promotional materials online from his home in the district. In doing so, the court formulated a
four-factor test to evaluate whether a defendant maintains a regular and
established place of business in a district, which notably did not require a
defendant to maintain a physical presence in the district. Cray filed a petition for writ of mandamus in
July 2017 asking the Federal Circuit to vacate the district court’s four-factor
test and direct transfer to a proper venue.

A “Regular and Established Place of Business” Is a
Physical Location of the Defendant

Prior to the In re CrayInc. decision,
the Federal Circuit’s last word on the meaning of “regular and established
place of business” came in 1985. In that
case, In re Cordis Corp., the defendant
used its employees’ homes in a district to store literature and products, and
relied on those employees to deliver products to its customers. The company also retained a local
administrative service to support the employees’ activities in the district and
publicly listed the service’s address as its own office. In denying defendant’s venue challenge, the
Federal Circuit wrote that the “appropriate inquiry” is “whether the corporate
defendant does its business in [a] district through a permanent and continuous
presence there” and not “whether it has a fixed physical presence in the sense
of a formal office or store.” But the
court declined to provide further guidance for evaluating what constitutes a
“regular and established place of business.”
The issue remained largely untouched for more than three decades.

On September 21, the Federal Circuit
granted Cray’s petition for writ of mandamus, vacated the district court’s
denial of transfer and four-factor test, and provided much needed guidance on
what constitutes a “regular and established place of business” under Section 1400(b). Seemingly mindful of
the dearth of precedent on the subject, the court explained each step of its
statutory interpretation. As a starting
point, it noted that the legislative history of Section 1400(b)
indicated an intent by the legislature to restrict patent venue, not expand it. Further, the court cited the Supreme Court’s
instruction that venue is decidedly not “one
of those vague principles . . . to be given a liberal construction.” With these guideposts in mind, the court set
forth three requirements: (1) the
location must be a “place,” (2) that place must be “regular and established,”
and (3) the place must be “of the defendant.”

The court addressed each prong in
turn. First, it explained that a “place”
must be a physical location. Although a
formal storefront is not required, the court rejected the notion that a
“virtual” or “electronic” presence might create patent venue.Next, the court interpreted the adjectives
“regular and established” to require some showing of stability, or continuity
over time. The court specifically noted
that sporadic or temporary business activities were not sufficient, but indicated
that continuous business for a series of years likely was.

Finally, the court explained that a place
is “of the defendant” if the place was “establish[ed] or ratif[ied]” by it. A number of considerations come into play
here, but significantly a place is not “of a defendant” if it is “solely a
place of the defendant’s employees.” The
defendant, rather, must have some additional connection or control over that
place.Applying this freshly minted test to the
facts of the case, the court determined that venue was lacking because there
was no evidence that Mr. Harless’ house was a place of business of Cray. The court noted that while Mr. Harless
conducted business from his house in the district, there was nothing indicating
that Cray owned Mr. Harless’ residence, selected its location, conditioned his
employment on maintaining his residence, or even believed its location was important
to the work he performed. Stressing that
no one fact was controlling in its analysis, the court concluded that “the
facts [surrounding Mr. Harless’ home office] cannot support a finding that Cray
established a place of business in the Eastern District of Texas.” Accordingly, the court granted Cray’s
petition and directed transfer of venue.

Implications of Decision

In re
Cray will guide patent venue analysis going forward. A key takeaway for employers is that the
typical work-from-home employee will not create a “regular and established
place of business” for venue purposes. In
rejecting the position that such home offices are sufficient, the Federal
Circuit explicitly stated that a “home in which [defendant’s employee] carries
on some work that he does for the defendant” does not meet the standard.

More broadly, the decision will likely
shift much of U.S. patent litigation out of the Eastern District of Texas. While many companies, such as national
retailers will remain subject to venue in the Eastern District, many, if not
most, of U.S. corporations will not."[1] The authors represented petitioner Cray Inc. in this matter.

US patent litigation on the move again following In re Cray
Reviewed by Annsley Merelle Ward
on
Monday, October 30, 2017
Rating: 5

The IPKat licenses the use of its blog posts under a Creative Commons Attribution-Non Commercial Licence.

No comments:

All comments must be moderated by a member of the IPKat team before they appear on the blog. Comments will not be allowed if the contravene the IPKat policy that readers' comments should not be obscene or defamatory; they should not consist of ad hominem attacks on members of the blog team or other comment-posters and they should make a constructive contribution to the discussion of the post on which they purport to comment.

It is also the IPKat policy that comments should not be made completely anonymously, and users should use a consistent name or pseudonym (which should not itself be defamatory or obscene, or that of another real person), either in the "identity" field, or at the beginning of the comment. Current practice is to, however, allow a limited number of comments that contravene this policy, provided that the comment has a high degree of relevance and the comment chain does not become too difficult to follow.